Business Context and Reporting Period
Company: Grow Biz International, Inc. (Note: Metadata referenced "Winmark Corp," but the filing text identifies the registrant as Grow Biz International, Inc.)
Reporting Period: Quarterly period ended September 26, 1998 (Nine months ended September 26, 1998).
Business Model: Franchisor of retail concepts (e.g., Play It Again Sports, Once Upon A Child) that buy, sell, trade, and consign used merchandise. The company also operates corporate retail stores and sells inventory to franchisees via a buying group.
Key Financial Metrics
| Metric | Three Months Ended 9/26/98 | Nine Months Ended 9/26/98 |
|---|---|---|
| Total Revenue | $22.5 million | $71.6 million |
| Net Income | $1.5 million | $6.4 million |
| Diluted EPS | $0.26 | $1.06 |
| Operating Cash Flow | N/A | $8.3 million |
| Cash & Equivalents (End of Period) | $0 | $0 |
| Total Debt (Current + Long-Term) | $9.6 million | $9.6 million |
| Working Capital | $1.7 million | $1.7 million |
Note: Working Capital calculated as Total Current Assets ($22.4M) minus Total Current Liabilities ($20.7M).
Material Changes vs. Prior Period
- Revenue Growth: Nine-month revenue increased 15.7% to $71.6 million from $61.9 million in 1997. This was driven by a 97.3% increase in retail store sales ($22.5M vs $11.4M) due to the acquisition of Video Game Exchange stores and new openings, partially offset by an 8.3% decline in buying group sales as franchisees purchased more directly from vendors.
- Profitability: Net income for the nine months more than doubled to $6.4 million from $2.8 million. This includes a one-time $5.2 million gain from the sale of the Disc Go Round concept in June 1998.
- Liquidity: Cash and cash equivalents dropped from $3.1 million at the end of 1997 to $0 at September 26, 1998. This was primarily due to $16.3 million in stock repurchases and debt payments, partially offset by operating cash flow and the sale of Disc Go Round assets.
- Store Count: Total store count increased to 1,218 from 1,303 at the start of the year, reflecting the divestiture of 143 Disc Go Round locations, offset by 118 new openings across other concepts.
Guidance, Outlook, and Risks
- Outlook: Management anticipates buying group revenues will continue to decline as franchisees bypass the buying group. Retail sales are expected to increase with the opening of 15 additional corporate stores in 1998. Store openings for the full year are expected to be consistent with 1997 levels.
- Capital Resources: On October 13, 1998, the company secured an amended credit agreement increasing its line of credit to $10.0 million and obtaining an $8.0 million term note. All assets are now pledged as collateral.
- Litigation: The company is appealing a court ruling requiring a $2.0 million payment for development rights in the "Van Buskirk" matter. A $2.2 million letter of credit is currently held against the line of credit for this contingency.
- Year 2000 Compliance: The company is upgrading systems to be Y2K compliant by Q2/Q3 1999. Estimated future costs are under $250,000. Risks include potential manual processing of receivables if internal systems fail or reduced royalties if vendors fail to supply new products.
Investor Verification Checklist
- Cash Position: Verify the sustainability of operations with $0 cash on hand, relying heavily on the new $10M credit line and $8M term note.
- Debt Covenants: Review the terms of the new credit agreement signed October 13, 1998, specifically regarding collateral requirements and interest rates (Prime + 0.5%).
- One-Time Gains: Adjust earnings analysis to exclude the $5.2 million gain from the Disc Go Round sale to assess core operational profitability.
- Buying Group Trend: Monitor the continued decline in buying group revenue as franchisees shift to direct vendor purchasing.
- Litigation Exposure: Track the status of the Van Buskirk appeal and the potential impact of the $2.0 million liability on future cash flows.